Iron Ore Price to Surge 40% as Big Miners Become Mega Miners

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Did you see that the annual negotiations for the contract iron ore price began this week in Shanghai? In the blue corner are the big three: BHP (ASX:BHP), Rio (ASX:RIO), and Vale. They represent 70% of the sea-borne iron ore supply. In the red corner are the Chinese steel makers. China is the world’s largest producer and consumer of steel (around 400 million tonnes).

Welcome to the world of Big Mining. Or the OPEC of Iron Ore, as Patrick Barta put in yesterday’s Wall Street Journal. “For years now,” Barta writes, “mining companies have gotten rich supplying the raw materials that have fuelled consumer booms from China and India to Brazil. As commodities prices soared, these companies socked away cash and snapped up rivals. Now they are embarking on another round of deals that promises a new class of juggernauts. The resulting megaminers would have great influence over the cost of raw materials like iron ore, copper and uranium – and, by extension, the price of consumer electronics, cars and new apartment blocks.”

The iron price is already set to rise by about 40%. Chinese steel producers fear that consolidating Australia’s supply into BHRIO would create a cartel with the ability to fix prices above the market rate. Hmnn.

In the spot market, where Chinese steel producers buy on demand from India, ore prices are already $100 higher than last year’s contract price. Perhaps that’s why Rio Tinto announced yesterday it would triple the amount of ore it sells on the spot market to around 15 million tonnes. The company reckons that would generate gross revenues of nearly $1.5 billion.

“Last year Rio sold 4.5 million tonnes on the spot market and plans to increase that to up to 15 million tonnes in 2008,” reports Andrew Trounson in today’s Australian. “The spot sales will be sourced from expanded production with Rio to continue to honour all its long-term contracts under which most of its iron ore is sold. Rio’s total managed production out of the Pilbara next year is forecast to rise to 200 million tonnes from around 160 million tonnes this year.”

Boom.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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